The principal problem for tax reform has always been that people want lower tax rates and in theory are willing to give up tax deductions and loopholes to pay for them, but they strenuously resist eliminating any particular tax preference from which they benefit. And the deduction for mortgage interest has long been among the most sacred of sacred cows in this respect.

This was a reasonable assumption at the time. Most people were renters. When they bought a home, they tended to pay cash. Moreover, until World War II very few people paid any federal income taxes: On the eve of war, only 3 percent of the population did. But by the end of the war, 30 percent of the population paid income taxes at rates much higher than today. Consequently, those in the middle class, who previously had given little thought to the value of tax deductions, suddenly wanted them. The mortgage interest deduction was an easy one for them to obtain.

At the same time, innovations in mortgage finance during the Roosevelt administration made it easier to obtain loans for home purchases, and the upward mobility of the middle class in the postwar era made home ownership in rapidly-growing suburbs attractive and achievable. The mortgage interest deduction lowers the cost of home ownership. If someone is in the 25 percent federal tax bracket, then Uncle Sam is essentially paying a quarter of their mortgage interest in the former of lower taxes.

Additionally, home owners can deduct property taxes and essentially pay no capital gains taxes when they sell their home because there is a $500,000 tax exemption on gains for couples and $250,000 for singles.

Of course, people also like the stability of home ownership, the suburban lifestyle, generally better schools than in the cities, and the protection from inflation. Consequently, home ownership has long been a key part – perhaps the key part – of the American Dream. When the after-tax cost of owning a home falls below the cost of renting, most people jump at the chance to own.

The problem, insofar as tax reform is concerned, is that the mortgage interest deduction and that for property taxes reduce federal revenues by $100 billion per year. Including other tax benefits for housing raises the revenue cost to $185 billion. Another problem is that the mortgage interest deduction predominantly benefits the well to do. Three-fourths of all the tax savings from it accrue to those with incomes over $100,000 per year.

The reason is simple. The wealthy are more likely to be homeowners and also benefit more from the deduction for mortgage interest. Someone in the top tax bracket saves 35 cents of each $1 of mortgage interest paid, while someone in the lowest bracket only saves 10 cents.

The middle class benefits a lot less from the mortgage interest deduction than it thinks it does. Those with incomes between $50,000 and $75,000 only save $362 per year in taxes. One reason is that those in the middle class are more likely to stay put and pay down their mortgage, thus reducing the amount of mortgage interest they have to deduct annually.

According to the Census Bureau, about a third of owner-occupied homes have no mortgage at all. Many are the elderly who paid them off and live rent-free and mortgage-free.

Even these people, however, still have a stake in preserving the mortgage interest deduction. That is because the value of the deduction is capitalized into home prices. A common estimate is that home prices would fall by 15 percent if the deduction is abolished. So even those with no mortgage would suffer. There would be macroeconomic and tax simplification benefits from abolishing the mortgage interest deduction. But historically, these reasons have not been persuasive, politically.

Nevertheless, mortgage interest keeps coming up in discussions of tax reform because it is the proverbial elephant in the living room. It is hard to do meaningful reform while leaving it in place. For both revenue and distributional reasons, mortgage interest cannot be ignored in the debate on tax reform.This has created problems, especially for Republicans because they are keen on making tax reform a campaign issue.

GOP nominee Mitt Romney has a plan that would reduce statutory tax rates by 20 percent. But he has said he would eliminate enough deductions and loopholes to equal current federal revenues and also ensure that the wealthy pay the same percentage of total taxes as they pay now.

But the Tax Policy Center recently concluded that Romney’s proposal is mathematically impossible even if the mortgage interest deduction and all other deductions are abolished. Romney reacted angrily to the study, denying he would touch the mortgage interest deduction for middle-income taxpayers. But at the same time, he has steadfastly refused to say what deductions he would in fact get rid of to pay for his plan.

This week, writers of the Republican platform in Tampa dipped their toe in the tax reform water by excising a plank in previous platforms defending the mortgage interest deduction. Under pressure from groups such as the National Association of Home Builders, language was quickly reinserted to protect the deduction.

The fact is that if fundamental tax reform is on the table, then so is the mortgage interest deduction. Making an exception for it automatically becomes the best possible argument for keeping the next most popular deduction and so on – until we are right back where we started. The fact that Republicans backtracked on mortgage interest the moment there was pushback from special interests doesn’t bode well for tax reform even if Mr. Romney wins.

The principal problem for tax reform has always been that people want lower tax rates and in theory are willing to give up tax deductions and loopholes to pay for them, but they strenuously resist eliminating any particular tax preference from which they benefit. And the deduction for mortgage interest has long been among the most sacred of sacred cows in this respect.

Many people mistakenly believe that the mortgage interest deduction was instituted for the express purpose of stimulating home ownership. This is incorrect. The deduction exists because the original income tax of 1913 allowed a deduction for all interest, on the theory that people only borrowed for business or investment purposes.

This was a reasonable assumption at the time. Most people were renters. When they bought a home, they tended to pay cash. Moreover, until World War II very few people paid any federal income taxes: On the eve of war, only 3 percent of the population did. But by the end of the war, 30 percent of the population paid income taxes at rates much higher than today. Consequently, those in the middle class, who previously had given little thought to the value of tax deductions, suddenly wanted them. The mortgage interest deduction was an easy one for them to obtain.

At the same time, innovations in mortgage finance during the Roosevelt administration made it easier to obtain loans for home purchases, and the upward mobility of the middle class in the postwar era made home ownership in rapidly-growing suburbs attractive and achievable. The mortgage interest deduction lowers the cost of home ownership. If someone is in the 25 percent federal tax bracket, then Uncle Sam is essentially paying a quarter of their mortgage interest in the former of lower taxes.

Additionally, home owners can deduct property taxes and essentially pay no capital gains taxes when they sell their home because there is a $500,000 tax exemption on gains for couples and $250,000 for singles.

Of course, people also like the stability of home ownership, the suburban lifestyle, generally better schools than in the cities, and the protection from inflation. Consequently, home ownership has long been a key part – perhaps the key part – of the American Dream. When the after-tax cost of owning a home falls below the cost of renting, most people jump at the chance to own.

The problem, insofar as tax reform is concerned, is that the mortgage interest deduction and that for property taxes reduce federal revenues by $100 billion per year. Including other tax benefits for housing raises the revenue cost to $185 billion. Another problem is that the mortgage interest deduction predominantly benefits the well to do. Three-fourths of all the tax savings from it accrue to those with incomes over $100,000 per year.

The reason is simple. The wealthy are more likely to be homeowners and also benefit more from the deduction for mortgage interest. Someone in the top tax bracket saves 35 cents of each $1 of mortgage interest paid, while someone in the lowest bracket only saves 10 cents.

The middle class benefits a lot less from the mortgage interest deduction than it thinks it does. Those with incomes between $50,000 and $75,000 only save $362 per year in taxes. One reason is that those in the middle class are more likely to stay put and pay down their mortgage, thus reducing the amount of mortgage interest they have to deduct annually.

According to the Census Bureau, about a third of owner-occupied homes have no mortgage at all. Many are the elderly who paid them off and live rent-free and mortgage-free.

Even these people, however, still have a stake in preserving the mortgage interest deduction. That is because the value of the deduction is capitalized into home prices. A common estimate is that home prices would fall by 15 percent if the deduction is abolished. So even those with no mortgage would suffer. There would be macroeconomic and tax simplification benefits from abolishing the mortgage interest deduction. But historically, these reasons have not been persuasive, politically.

Nevertheless, mortgage interest keeps coming up in discussions of tax reform because it is the proverbial elephant in the living room. It is hard to do meaningful reform while leaving it in place. For both revenue and distributional reasons, mortgage interest cannot be ignored in the debate on tax reform.This has created problems, especially for Republicans because they are keen on making tax reform a campaign issue.

GOP nominee Mitt Romney has a plan that would reduce statutory tax rates by 20 percent. But he has said he would eliminate enough deductions and loopholes to equal current federal revenues and also ensure that the wealthy pay the same percentage of total taxes as they pay now.

But the Tax Policy Center recently concluded that Romney’s proposal is mathematically impossible even if the mortgage interest deduction and all other deductions are abolished. Romney reacted angrily to the study, denying he would touch the mortgage interest deduction for middle-income taxpayers. But at the same time, he has steadfastly refused to say what deductions he would in fact get rid of to pay for his plan.

This week, writers of the Republican platform in Tampa dipped their toe in the tax reform water by excising a plank in previous platforms defending the mortgage interest deduction. Under pressure from groups such as the National Association of Home Builders, language was quickly reinserted to protect the deduction.

The fact is that if fundamental tax reform is on the table, then so is the mortgage interest deduction. Making an exception for it automatically becomes the best possible argument for keeping the next most popular deduction and so on – until we are right back where we started. The fact that Republicans backtracked on mortgage interest the moment there was pushback from special interests doesn’t bode well for tax reform even if Mr. Romney wins.

No one said reforming the tax code would be easy, but it HAS to be done...now, if only there was someone with the backbone to do it

_________________

Quote:

Clowns to the left of me, Jokers to the right....

August 24th, 2012, 10:06 am

TheRealWags

Modmin Dude

Joined: December 31st, 2004, 9:55 amPosts: 12312

Re: Tax Thread!

Another article highlighting the difficulty some peeps are having in trusting / believing what Romney / Ryan are saying in reference to taxes:

CNN Money wrote:

NEW YORK (CNNMoney) -- The nature of campaigning is to make promises. The nature of governing makes it hard to keep all those promises. And so do unforeseen events, like recessions.

That may be why even those who broadly favor the kind of tax reform that Mitt Romney is proposing -- lower tax rates, fewer tax breaks -- worry that his $5 trillion plan might not deliver all that he's promised.

If elected, Romney says he would work with Congress to lower income tax rates by 20%, repeal the Alternative Minimum Tax and make investments tax free for everyone except those making more than $100,000 ($200,000 if married).

The rich as a group, Romney says, would continue to pay the same share of revenue they pay today, and the middle class would see its tax burden lowered.

His plan wouldn't add a penny to deficits, Romney promises, because his tax cuts would be paid for through a combination of reduced tax breaks and the economic growth his plans would generate.

The only problem: Fulfilling those promises -- politically and practically -- is far from a sure thing.

Cutting tax breaks: To pay for any substantive rate reduction, a lot of tax breaks will have to be eliminated or significantly reduced. That means lawmakers will have to say "no" to lobbyists and constituents in their home states who have enjoyed those breaks.

Lawmakers won't have the stomach for it, said Christopher Bergin, president and publisher of Tax Analysts. "These guys have the political courage of my couch. ... I'll predict with certainty that Congress will fail [Romney]."

There's precedent for Bergin's pessimism. The last time Congress embarked on the kind of tax reform Romney is proposing was in 1986. Since then lawmakers have created dozens of new tax breaks and made the tax code even more complex.

It might be easier on lawmakers if Romney backs a cap on itemized deductions -- which he said is an option. But his campaign has said curbing tax breaks likely wouldn't be limited to itemized deductions, so a cap on them wouldn't preclude fights about other tax breaks.

Economic growth: Proponents of lower tax rates and fewer tax breaks say such a system would be more economically efficient than today's code.

To put it another way: People would start to put their money into activities and investments where it makes the best economic sense, rather than where they can get the best tax break. That, in turn, could boost economic growth and revenue.

But if Congress fails to rein in tax breaks sufficiently, Romney will have to lean very heavily on economic growth to generate much of the estimated $5 trillion in revenue that his tax cuts would cost.

If that's the case, "you're betting on a shaky horse," Bergin said.

That's because no matter how well it's designed, tax reform won't be an economic panacea. Many factors other than taxes play a role in spurring or slowing the economy. And that has a bearing on federal coffers.

Since 2000, significant tax cuts were passed in 2001, 2003, 2006, 2009 and 2010. But there have also been two recessions. Revenue intake for nine of the past 12 years has been well below the historical average of 18.3% of the size of the economy. And for five of those years, the dollar amount of revenue actually fell from the year before.

Even elements of the tax reform itself may tamp down the growth and revenue potential. If a new measure is implemented immediately, that could be very economically disruptive. But if it's phased in slowly to avoid that disruption, the revenue that could help pay for the tax cuts may not materialize for years.

Mitt Romney and his running mate, Paul Ryan, are quite insistent that their tax plan is just the elixir that the economy needs to jumpstart growth. As Mr. Ryan said at last week’s debate, “Our entire premise of these tax reform plans is to grow the economy and create jobs.” He pointed to the similarity between Mr. Romney’s tax plan and the one that became law under Ronald Reagan in 1986.

Indeed, there is similarity between the Reagan and Romney tax plans. Reagan broadened the tax base by eliminating tax deductions and loopholes and used the revenue to lower the top statutory federal income rate to 28 percent – exactly as Mr. Romney proposes.

In principle, a change that holds revenues constant while lowering marginal tax rates – the rate on the last dollar earned – should increase growth. That is because, in economist-speak, both the income and the substitution effects are pushing in the same direction.

The income effect results when taxes rise. People have to work and produce more to pay the additional tax in order to have the same amount of disposable income they had previously. Conversely, if taxes fall, the opposite effect occurs – people can work and produce less and still have the same disposable income.

The substitution effect arises when marginal tax rates alter the trade-offs between work and leisure, saving and consumption, taxable investments and tax-sheltered investments such as municipal bonds, taxable wages and nontaxable fringe benefits such as health insurance, renting and owning a home and so on.

What Reagan did and Mr. Romney proposes is to keep taxes constant but to reduce marginal tax rates. By “taxes” I mean aggregate tax revenues; there was no overall tax cut in 1986 or in the Romney plan. Mr. Romney has said repeatedly that the level of tax revenues will be exactly the same after his plan is implemented as they otherwise would be. In the aggregate, there is no tax cut in the Romney plan.

But under the Romney plan, marginal tax rates would fall by 20 percent across the board – not 20 percentage points but 20 percent of the rate. With the top rate at 35 percent presently, a 20 percent reduction would lower it by seven percentage points to 28 percent. Other rates would fall proportionately.

A full distributional analysis of the Romney plan cannot be done because Mr. Romney hasn’t said what deductions and loopholes would be eliminated to pay for his rate cut. He only recently suggested that he would not eliminate them individually but rather would cap all deductions at $17,000 per taxpayer.

For the sake of argument, let’s assume that the Romney plan is revenue-neutral. Thus for those with itemized deductions larger than $17,000 in total, taxes would rise. But their tax rate would fall. In the aggregate, the rate reduction will offset 100 percent of the tax rise.

Of course, the aggregate tax change will affect different taxpayers differently. Some people will pay more total federal income taxes than they pay now, and others will pay less. Those who don’t itemize will get the benefit of the rate cut but not pay more taxes as a result of the loss of deductions, because they don’t have any. People with large deductions relative to their income may see a large increase in taxes that is only partially offset by the rate reduction.

Leaving aside the question of fairness, this is not necessarily a bad thing. The idea of tax reform is to get people away from basing economic decisions, such as whether to rent or a buy a home, on tax considerations. In principle, work and investment decisions become more efficient and thereby raise growth.

As noted earlier, economic theory is unambiguous that holding taxes constant and reducing marginal rates will increase growth. But it is important to understand that this effect is neither large nor instantaneous. At best, it will raise the long-term trend rate of growth by perhaps tenths of a percent. With compounding, the effect can eventually be large.

But the idea that tax reform will jump-start an economy suffering from the after-effects of a cyclical downturn is nonsense. This can be illustrated by looking at the impact of the 1986 tax reform.Real gross domestic product growth was about the same after the 1986 act took effect in 1987 as it was before, and tax reform obviously did nothing to forestall the 1990-91 recession. Unemployment fell, but it had been trending downward before tax reform, and the 1986 act probably had nothing to do with it. Within a couple of years it was trending upward again.

By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth. In an article in the May 1995 issue of the American Economic Review, the Harvard economist Martin Feldstein, a strong supporter of tax reform who had served as chairman of Reagan’s Council of Economic Advisers, found large changes in the composition of income, but the only growth effect was a small increase in the labor supply of married women.

In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. They concluded, “The aggregate values of labor supply and saving apparently responded very little.”

Compositional changes in income are not unimportant and may be worth the effort of doing tax reform, even if there is no growth effect whatsoever. For example, it may improve fairness, simplicity and tax administration. But it appears that even in a best-case scenario in which the top rate comes down a lot – the 1986 act lowered the top rate 22 percentage points from 50 percent – the real economic effects are at best very modest.

Mr. Romney’s plan is not likely to be enacted in anywhere near the form he has proposed, if only because Congress is far more polarized today than it was in 1986, and the major political parties are much farther apart on the goals of tax reform. Consequently, there is little reason to think we will see tax reform any time soon, and even if Mr. Romney’s plan is enacted as proposed the growth effect will be small to nonexistent.

No one said reforming the tax code would be easy, but it HAS to be done...now, if only there was someone with the backbone to do it

The thing is it is very easy, you don't reform the tax code you throw it out and start over with two options:

1) A flat tax rate, everyone pays the same with no deductions.2) A sales tax that replaces the income tax.

And just think how much money we save by basically getting rid of the IRS and for tax prep.

That's just crazy talk!

Pablo wrote:

The gov't tries to encourage certain behavior through the tax code, this is flat out wrong IMO. The gov't shouldn't be in the biz of encouraging people to buy houses or have kids.

Agreed.

_________________

Quote:

Clowns to the left of me, Jokers to the right....

October 17th, 2012, 11:41 am

TheRealWags

Modmin Dude

Joined: December 31st, 2004, 9:55 amPosts: 12312

Re: Tax Thread!

Interesting post from American entrepreneur and venture capitalist

Nick Hanauer wrote:

Sympathy for the PlutocratBy Nick HanauerOctober 16, 2012

This is a response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press.

It’s great to be what you people are now calling a plutocrat. I know. I am one.

We plutocrats live incredible lives, surrounded by luxury and insulated from risk and discomfort. Things have gone very well for us over the last several years. Since George Bush left office, the stock market has doubled, we got a (sweet!) $700 billion rescue of the financial system, and corporate profits are at a 50-year high. BOOYA!

The growing economic distance between people like me and the little people like you hasn’t been this great in a long, long time. You may call that inequality. We call it freedom. But if things are going to continue to go this well, you people need to get with the program. Here, I’d like to have a frank discussion about that.

It is something of a puzzle to many of you little people why we plutocrats, who have benefitted most from these trends, view President Obama with such intense disdain. Why, you might ask, given how good the economy has been to you plutocrats, are you so maniacally angry?

“Maybe,” you say to yourself, “I just don’t understand economics.” I’ll let you in on a little secret. You understand economics just fine. What you don’t understand is that this fight isn’t about economics. It’s about status, privileges and power.

People like me don’t hate Obama because he’s going to raise our taxes, although we hate that plenty. We hate him because his views about the importance and primacy of the middle class diminish our status. The threat he represents isn’t economic; it’s existential. It’s not just our pocket books that are threatened, but, more importantly, our prestige and our influence on this country. Our manhood is at stake.

Facts are for little people.We plutocrats have a long and proud history of controlling human societies, and the belief systems that we create about how the world works enable us to do that. “Earth is the center of the solar system” was a useful one for us in the past. “Lowering taxes on the rich produces growth” is one of our current favorites. You show me an orthodox belief, and I’ll show you plutocrats who benefit from it.

We understand human nature well enough to know that people believe and accept ideas for all sorts of reasons, but rarely because of facts or evidence. Mostly, people believe what suits them, what makes them feel good. And what makes us feel good is a set of beliefs that reinforce our status, privileges and power.

So it’s both annoying and hilarious that you people think you’re going to be able to talk us out of being plutocrats with “evidence” or “facts”. Our current position and power is the only fact we care about. And we viscerally hate anyone who has the temerity to challenge it.

When Jack or Mitt or I call ourselves “Job Creators”, it isn’t because it’s true or that there is any evidence for it. It’s because being a job creator puts us right at the center of the economic universe – where we deserve to be. This belief system isn’t just convenient to us, although it is. It’s essential in order to justify our status and power.

We used to call this divine right. Today we call it “economics”.

You say democracy. We say plutocracy.You need to understand that as job creators, at the center of the economic universe, the better we do, the better it must be for you. In particular, the richer we get and the less constrained by law and regulation we are, the more jobs will trickle downward. Basically, the less we plutocrats contribute to society in tax, and the less constrained we are, the better it is for you and everyone else. And you thought we didn’t care!

You need to accept as fact the idea that all prosperity trickles down from the top. That means that, economically speaking, we plutocrats matter. It also means that you don’t matter. Tax cuts for the rich create growth and jobs. Investments in the middle class and the poor balloon the deficit and will bankrupt this great country. National budget priorities that reflect this will be great for you and your family. Really.

A bard once said that plutocrats hate regulation for the same reason that robbers hate cops. That’s a cheap shot, and underappreciates the sophistication of our argument. Since we are the “job creators”, any restraint on us necessarily decreases the jobs that trickle down to you. That’s why we deserve a free hand to run the country in whatever way suits us best. You show me a country with limited government and regulation, and I’ll show you some happy plutocrats busily “job-creating”.

Get With The Program!So what’s puzzling you about why we hate Obama? He’s in our way. And that’s a much bigger threat to us than higher tax rates. Our incredible sway over politics, the economy and culture is being challenged.

Repeat after me. You sir, are a job creator and the richer you get, the better off my family will be. Regulation is bad, and the less of it we have, the better off my family will be. Never forget these things. And never forget that the rising inequality you see all around isn’t a sign of decay. It’s a sign of prosperity. Get with the program. Now. Or we will fire you.

Mitt Romney and his running mate, Paul Ryan, are quite insistent that their tax plan is just the elixir that the economy needs to jumpstart growth. As Mr. Ryan said at last week’s debate, “Our entire premise of these tax reform plans is to grow the economy and create jobs.” He pointed to the similarity between Mr. Romney’s tax plan and the one that became law under Ronald Reagan in 1986.

Indeed, there is similarity between the Reagan and Romney tax plans. Reagan broadened the tax base by eliminating tax deductions and loopholes and used the revenue to lower the top statutory federal income rate to 28 percent – exactly as Mr. Romney proposes.

In principle, a change that holds revenues constant while lowering marginal tax rates – the rate on the last dollar earned – should increase growth. That is because, in economist-speak, both the income and the substitution effects are pushing in the same direction.

The income effect results when taxes rise. People have to work and produce more to pay the additional tax in order to have the same amount of disposable income they had previously. Conversely, if taxes fall, the opposite effect occurs – people can work and produce less and still have the same disposable income.

The substitution effect arises when marginal tax rates alter the trade-offs between work and leisure, saving and consumption, taxable investments and tax-sheltered investments such as municipal bonds, taxable wages and nontaxable fringe benefits such as health insurance, renting and owning a home and so on.

What Reagan did and Mr. Romney proposes is to keep taxes constant but to reduce marginal tax rates. By “taxes” I mean aggregate tax revenues; there was no overall tax cut in 1986 or in the Romney plan. Mr. Romney has said repeatedly that the level of tax revenues will be exactly the same after his plan is implemented as they otherwise would be. In the aggregate, there is no tax cut in the Romney plan.

But under the Romney plan, marginal tax rates would fall by 20 percent across the board – not 20 percentage points but 20 percent of the rate. With the top rate at 35 percent presently, a 20 percent reduction would lower it by seven percentage points to 28 percent. Other rates would fall proportionately.

A full distributional analysis of the Romney plan cannot be done because Mr. Romney hasn’t said what deductions and loopholes would be eliminated to pay for his rate cut. He only recently suggested that he would not eliminate them individually but rather would cap all deductions at $17,000 per taxpayer.

For the sake of argument, let’s assume that the Romney plan is revenue-neutral. Thus for those with itemized deductions larger than $17,000 in total, taxes would rise. But their tax rate would fall. In the aggregate, the rate reduction will offset 100 percent of the tax rise.

Of course, the aggregate tax change will affect different taxpayers differently. Some people will pay more total federal income taxes than they pay now, and others will pay less. Those who don’t itemize will get the benefit of the rate cut but not pay more taxes as a result of the loss of deductions, because they don’t have any. People with large deductions relative to their income may see a large increase in taxes that is only partially offset by the rate reduction.

Leaving aside the question of fairness, this is not necessarily a bad thing. The idea of tax reform is to get people away from basing economic decisions, such as whether to rent or a buy a home, on tax considerations. In principle, work and investment decisions become more efficient and thereby raise growth.

As noted earlier, economic theory is unambiguous that holding taxes constant and reducing marginal rates will increase growth. But it is important to understand that this effect is neither large nor instantaneous. At best, it will raise the long-term trend rate of growth by perhaps tenths of a percent. With compounding, the effect can eventually be large.

But the idea that tax reform will jump-start an economy suffering from the after-effects of a cyclical downturn is nonsense. This can be illustrated by looking at the impact of the 1986 tax reform.Real gross domestic product growth was about the same after the 1986 act took effect in 1987 as it was before, and tax reform obviously did nothing to forestall the 1990-91 recession. Unemployment fell, but it had been trending downward before tax reform, and the 1986 act probably had nothing to do with it. Within a couple of years it was trending upward again.

By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth. In an article in the May 1995 issue of the American Economic Review, the Harvard economist Martin Feldstein, a strong supporter of tax reform who had served as chairman of Reagan’s Council of Economic Advisers, found large changes in the composition of income, but the only growth effect was a small increase in the labor supply of married women.

In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. They concluded, “The aggregate values of labor supply and saving apparently responded very little.”

Compositional changes in income are not unimportant and may be worth the effort of doing tax reform, even if there is no growth effect whatsoever. For example, it may improve fairness, simplicity and tax administration. But it appears that even in a best-case scenario in which the top rate comes down a lot – the 1986 act lowered the top rate 22 percentage points from 50 percent – the real economic effects are at best very modest.

Mr. Romney’s plan is not likely to be enacted in anywhere near the form he has proposed, if only because Congress is far more polarized today than it was in 1986, and the major political parties are much farther apart on the goals of tax reform. Consequently, there is little reason to think we will see tax reform any time soon, and even if Mr. Romney’s plan is enacted as proposed the growth effect will be small to nonexistent.

This is the perfect example of how a chart that claims to show everything, shows nothing at all.

The 86 tax cuts were offset by the biggest market crash since the Great Depression, but surprise.... notice unemployment still goes down in the years that follow. Jobs were still able to be created because.....taxes were low. The reason for the recession? Carter's initial repeal of Glass/Steagall started the savings and loans bubble. Since it wasn't completely repealed until Clinton, the bubble took longer to happen, but regardless, the economy stood up to the drop and it started to grow again.

In 1989, Inflation then increased to 5.1% and the Fed increased the interest rate to fight it, which caused the slowdown. And thus the initial drop. Then the gulf war and the oil spike drove it even worse.

So just a little example about how the above chart is misleading if you take it at face value. In the current economy, this actually shows that lowering taxes creates jobs faster than what we're currently doing.

I know someone will mention Clinton, so I'll address that also. He did raise taxes at the high end, but he also cut taxes in important areas and then severely cut spending. Bush 2's taxcut and spend and Obama's Tax and spend don't work. Cutting taxes and cutting spending works. The biggest gain though was welfare reform which put more people in the work force, that increased tax revenue from those people.

Who's tax plan does that sound like out of our candidates now?

October 17th, 2012, 2:20 pm

TheRealWags

Modmin Dude

Joined: December 31st, 2004, 9:55 amPosts: 12312

Re: Tax Thread!

njroar wrote:

This is the perfect example of how a chart that claims to show everything, shows nothing at all.

The 86 tax cuts were offset by the biggest market crash since the Great Depression, but surprise.... notice unemployment still goes down in the years that follow. Jobs were still able to be created because.....taxes were low. The reason for the recession? Carter's initial repeal of Glass/Steagall started the savings and loans bubble. Since it wasn't completely repealed until Clinton, the bubble took longer to happen, but regardless, the economy stood up to the drop and it started to grow again.

In 1989, Inflation then increased to 5.1% and the Fed increased the interest rate to fight it, which caused the slowdown. And thus the initial drop. Then the gulf war and the oil spike drove it even worse.

So just a little example about how the above chart is misleading if you take it at face value. In the current economy, this actually shows that lowering taxes creates jobs faster than what we're currently doing.

I know someone will mention Clinton, so I'll address that also. He did raise taxes at the high end, but he also cut taxes in important areas and then severely cut spending. Bush 2's taxcut and spend and Obama's Tax and spend don't work. Cutting taxes and cutting spending works. The biggest gain though was welfare reform which put more people in the work force, that increased tax revenue from those people.

Who's tax plan does that sound like out of our candidates now?

Sources and/or links please.

_________________

Quote:

Clowns to the left of me, Jokers to the right....

October 17th, 2012, 2:49 pm

njroar

Player of the Year - Offense

Joined: September 25th, 2007, 3:20 amPosts: 2908

Re: Tax Thread!

That's mostly out of memory... look up the 80's and 90's recessions.

October 17th, 2012, 2:51 pm

TheRealWags

Modmin Dude

Joined: December 31st, 2004, 9:55 amPosts: 12312

Re: Tax Thread!

njroar wrote:

That's mostly out of memory... look up the 80's and 90's recessions.

With respect, unless sources are able to be provided, I think I'll go with Bruce Bartlett on this topic.

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October 17th, 2012, 2:57 pm

njroar

Player of the Year - Offense

Joined: September 25th, 2007, 3:20 amPosts: 2908

Re: Tax Thread!

TheRealWags wrote:

njroar wrote:

That's mostly out of memory... look up the 80's and 90's recessions.

With respect, unless sources are able to be provided, I think I'll go with Bruce Bartlett on this topic.

I'm sick, so I just don't have the patience to go google the actual history of what happened right now. You can go with him, but he's leaving the facts out to make it seem like his story makes sense.

October 17th, 2012, 5:45 pm

TheRealWags

Modmin Dude

Joined: December 31st, 2004, 9:55 amPosts: 12312

Re: Tax Thread!

njroar wrote:

TheRealWags wrote:

njroar wrote:

That's mostly out of memory... look up the 80's and 90's recessions.

With respect, unless sources are able to be provided, I think I'll go with Bruce Bartlett on this topic.

I'm sick, so I just don't have the patience to go google the actual history of what happened right now. You can go with him, but he's leaving the facts out to make it seem like his story makes sense.

To be honest, it wouldn't surprise me in the least if he did, however he is considered an expert in the field by many and has served under Pres Reagan & Bush I, as well as Paul Ryan's mentor, Jack Kemp; that's why I'm choosing to go with him for now.

Quote:

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

And dude, get some rest, the Lions are going to need you on Monday night